Lecture7 OverviewofInventory&NetworkDesignLecture7 OverviewofInventory&NetworkDesign

BM0472InternationalTradeManagement

Inventory Appreciatetheimplicationsofinventoryonbusinesss

profitabilityandcashflow

Explainthemajorreasonsforcarryinginventory

DistributionNetworks Understandtheroleoffacilitydecisions Identifythefactorsinfluencingnetworkdesign

LessonObjectives

Appreciatetheimplicationsofinventoryonbusinesssprofitabilityandcashflow

Explainthemajorreasonsforcarryinginventory

Inventory

Profitthroughinventorymanagement

4

TightLtd SlackLtd

Sales=5million

Employment=85staff

Sales=5million

Employment=85staff

FixedAssets=2.5million FixedAssets=2.5million

TightLtd SlackLtd

Independentcompany Apartofamultinationalgroup

Inventory=0.5million Inventory=2.5million

TightLtd SlackLtd

Inventory=0.5million Inventory=2.5million

Costofinventory=2millionInterests=300000Holdingcosts=23000

EXTRA COSTS

ExtracostsofSlack

8

H

o

l

d

i

n

g

c

o

s

t

ComparehowwellTightandSlackaredoing

TightLtd SlackLtd Remarks

Returnonsales

ProfitSales

250k5,000 k

5%

(73 k)5,000k

(1.46%)

Slackhasadditionalcosts

of323k

Returnonassets

Profit

Assetsemployed

250k3,000 k

8.3%

(73k)5,000 k

(1.46%)

Slackhasadditional stock

of2million

Freeoutcashflowtoo,forinvestment,wagesetc.9

Inventoryhidesproblems!

Inventoryhideswastes!

Wheninventoryisreduced,

problemsareexposed

ReasonsforInventory

12

Batchingeconomiesorcyclestocks Arisesfromthreesources

procurement

production

transportation

Scaleeconomiesareoftenassociatedwithallthree,whichcanresultintheaccumulationofinventorythatwillnotbeusedorsoldimmediately

13

Allorganizationsarefacedwithuncertainty.

Onthedemandside,thereisusuallyuncertaintyinhowmuchcustomerswillbuyandwhentheywillbuyit.

Onthesupplyside,theremightbeuncertaintyaboutobtainingwhatisneededfromsuppliersandhowlongitwilltakeforthefulfillmentoftheorder.

Uncertainty/SafetyStocks

Thetimeassociatedwithtransportationmeansthatevenwhilegoodsareinmotion,aninventorycostisassociatedwiththetimeperiod.Thelongerthetime,thehigherthecost.

WIPinventories,associatedwithmanufacturing,canbesignificantwhilethelengthoftimetheinventorysitsinamanufacturingfacilitywaitingandshouldbecarefullyevaluatedinrelationshiptoschedulingtechniquesandtheactualmanufacturing/assemblytechnology.

Time/InTransitandWorkinProcessStocks

15

SeasonalStocks Seasonalitycanoccurinthesupplyofrawmaterials,inthedemandforfinishedproduct,orinboth.

Thosefacedwithseasonalityissuesareconstantlychallengedwhendetermininghowmuchinventorytoaccumulate.

Seasonalitycanimpacttransportation.

16

AnticipatoryStocks

Whenanorganizationanticipatesthatanunusualeventmightoccurthatwillnegativelyimpactitssourceofsupplyorproductioncycle.

E.g.politicalunrest,badweather,labour strikes,pricehikes

17

Understandtheroleoffacilitydecisions Identifythefactorsinfluencingnetworkdesign Describeaframeworkfornetworkdesigndecisions

Distribution Networks

Responseme:1weekRequire:1facility

CustomersFacility

Responseme:5daysRequire:2facilies

CustomersFacility

Responseme:3daysRequire:5facilies

CustomersFacility

Responseme:nextdayRequire:13facilies

CustomersFacility

Responseme:samedayRequire:26facilies

CustomersFacility

ServiceandNumberofFacilities

NumberofFacilities

ResponseTime

Atthehighestlevel,performanceofadistributionnetworkisevaluatedalongtwodimensions:

Customersneedsthataremet Costofmeetingcustomerneeds

Changingthedistributionnetworkaffectsthecostofinventories,transportation,facilitiesand`information

FactorsAffectingNetworkDesign

CostsandNumberofFacilities

Cost

Numberoffacilities

Inventory

Transportation

Facility

5-27

Movetothelastslide!

FactorsInfluencingNetworkDesignDecisions

Strategic

Competitive

Technological

Macroeconomic

Political

Infrastructure

Logisticsandfacilitycost

Efficiencyvs Responsiveness

Efficiency Lowestcostlocationformanufacturingfacilities,evenif

locationisveryfarfrommarketsserved

Responsiveness Locatefacilitiesclosertothemarketandmayselectahigh

costlocationifthechoiceallowsthefirmtoreactquicklytochangingmarketneeds

Conveniencevs Discountstores Manysmallconveniencestoresinthesamearea Onelargediscountstorestoservethewholearea

StrategicFactorCompetitiveStrategy

StrategicFactorStrategicRolesofFacilities

Offshorefacility Lowcostfacilityforexportproduction Sourcefacility Lowcostfacilityforglobalproduction Serverfacility Regionalproductionfacilitytomeetspecificrequirement Contributorfacility Regionalproductionfacilitywithdevelopmentskills

(e.g.localcustomisation)

Outpostfacility Regionalproductionfacilitybuilttogainlocalskills Leadfacility Facilitythatleadsindevelopmentandprocesstechnologies

CompetitiveFactors

PositiveexternalitiesbetweenfirmsLocatefacilitiesclosetocompetitorstoreapbenefitsforall

LocatingtosplitthemarketWhenfirmsdonotcontrolprice,theylocatecloseto

competitorstogainlargermarketshare

CustomerresponsetimeandlocalpresenceShortresponsetime nearercustomer

TechnologicalFactorsCharacteristicsofavailableproductiontechnologies

Highfixedcosto Fewhighcapacitylocations

SignificanteconomiesofscaleLowfixedcost

o ManylocalfacilitiesLowertransportationcosts

FlexibilityofproductiontechnologyInflexibleproductiontechnology

o ManylocalfacilitiestoservelocalmarketsFlexibleproductiontechnology

o Consolidatemanufacturinginafewlargefacilities

MacroeconomicFactorsTariffsandTaxIncentives

Stronginfluenceonlocationdecisionso Hightariffs

o Taxincentivesforareaoflowereconomicdevelopment

o FTZ(FreeTradeZone)

ExchangeRateandDemandRiskFluctuationsinexchangerate

o Significantimpactonprofits

Fluctuationsindemando Excesscapacityinfactoryservingthatmarket,whichneedsto

bedivertedtoanothermarket

PoliticalFactors

PoliticalstabilityIncludinggovernmentstability,corruptionlevel,relationshipwithothercountries,policiestowardsforeigninvestors

LegalsystemsBusinesslawsmustbeclearandindependentofthegoverningparty

o Firmsfeelthattheyhaverecoursewhenthereisaproblemo e.g.enforcementofIPlaws

InfrastructureFactorsAvailabilityofgoodinfrastructure

Prerequisitetofacilitydecisions

KeyinfrastructureelementsAvailabilityofsitesAvailabilityofskilledlabourProximitytotransportationterminals

o Railstationso Airportso Seaports

HighwayaccessandtrafficcongestionLocalutilities

LogisticsandFacilityCosts

InventorycostsDecentralizedfacilities higherinventorycosts

TransportationcostsInboundtransportationcosts

o LowerbecauseinboundshipmentsarebiggerOutboundtransportationcosts

o Higherbecauseoutboundshipmentsrequirehighresponsiveness

FacilitycostsSetupcost

o FixedcostwhichincreaseswithmorefacilitiesOperatingcosts

o Variablecostswhichchangesaccordingtothelevelofproduction

CostsandNumberofFacilities

Cost

Numberoffacilities

Inventory

Transportation

Facility

5-38

Reference

Chapter9 ManagingInventoryintheSupplyChainManagingSupplyChains:ALogisticsApproach,InternationalEdition;9thed,JohnJ.Coyle,C.JohnLangley,Jr.,RobertA.Novack,BrianJ.Gibson;Cengage Learning;2013

Chapter5 NetworkDesignintheSupplyChainSupplyChainManagement Strategy,Planning,andOperation,2ndEdition,SunilChopra&PeterMeindl,PrenticeHall,2004